Document/ExhibitDescriptionPagesSize 1: 10-Q Quarterly Report HTML 678K
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3: EX-10.U Material Contract HTML 47K
4: EX-10.V Material Contract HTML 47K
5: EX-10.Y Material Contract HTML 25K
6: EX-31.A Certification -- §302 - SOA'02 HTML 21K
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8: EX-32.A Certification -- §906 - SOA'02 HTML 18K
9: EX-32.B Certification -- §906 - SOA'02 HTML 18K
16: R1 Cover Page HTML 69K
17: R2 Consolidated Statements of Operations HTML 106K
18: R3 Consolidated Statements of Comprehensive Income HTML 39K
19: R4 Consolidated Statements of Financial Position HTML 104K
20: R5 Consolidated Statements of Financial Position HTML 34K
(Parenthetical)
21: R6 Consolidated Statements of Cash Flows HTML 102K
22: R7 Consolidated Statements of Shareholders' HTML 77K
Investment
23: R8 Consolidated Statements of Shareholders' HTML 18K
Investment (Parenthetical)
24: R9 Accounting Policies HTML 20K
25: R10 Impact of Coronavirus (Covid-19) HTML 21K
26: R11 Revenues HTML 77K
27: R12 Fair Value Measurements HTML 58K
28: R13 Property and Equipment HTML 19K
29: R14 Commercial Paper and Long-Term Debt HTML 20K
30: R15 Derivative Financial Instruments HTML 48K
31: R16 Share Repurchase HTML 35K
32: R17 Pension Benefits HTML 47K
33: R18 Accumulated Other Comprehensive Loss HTML 36K
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35: R20 Fair Value Measurements (Tables) HTML 59K
36: R21 Derivative Financial Instruments (Tables) HTML 46K
37: R22 Share Repurchase (Tables) HTML 35K
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42: R27 Revenues - Narrative (Details) HTML 30K
43: R28 Revenues - Gift Card Liability (Details) HTML 23K
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Measurements - Recurring Basis (Details)
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Financial Instruments not Measured at Fair Value
(Details)
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Hedges on Debt (Details)
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Hedges on Net Interest Expense (Details)
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(excluding ASR) (Details)
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(Exact name of registrant as specified in its charter)
iMinnesota
(State or other jurisdiction of incorporation or organization)
i1000
Nicollet Mall, iMinneapolis, iMinnesota
(Address of principal executive offices)
i41-0215170
(I.R.S.
Employer Identification No.)
i55403
(Zip Code)
Registrant’s telephone number, including area code: i612/i304-6073
Former name, former address and former fiscal year, if changed since last report: N/A
Securities registered pursuant to Section 12(b) of the Securities Exchange Act of 1934:
Title of each class
Trading Symbol(s)
Name
of each exchange on which registered
iCommon stock, par value $0.0833 per share
iTGT
iNew
York Stock Exchange
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
iYes☒No ☐
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). iYes☒ No ☐
Indicate
by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company (as defined in Rule 12b-2 of the Exchange Act).
iLarge
accelerated filer
☒
Accelerated filer
☐
Non-accelerated filer
☐
Smaller reporting company
i☐
Emerging
growth company
i☐
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate
by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes i☐No ☒
Indicate the number of shares outstanding of each of registrant’s classes of common stock, as of the latest practicable date. Total shares of common stock, par value $0.0833, outstanding at August 21, 2020 were i500,617,844.
Current
portion of long-term debt and other borrowings
i109
i161
i1,153
Total
current liabilities
i15,892
i14,487
i14,364
Long-term
debt and other borrowings
i14,188
i11,338
i10,365
Noncurrent
operating lease liabilities
i2,241
i2,275
i2,111
Deferred
income taxes
i1,121
i1,122
i1,082
Other
noncurrent liabilities
i1,980
i1,724
i1,808
Total
noncurrent liabilities
i19,530
i16,459
i15,366
Shareholders’
investment
Common stock
i42
i42
i43
Additional
paid-in capital
i6,248
i6,226
i6,114
Retained
earnings
i7,121
i6,433
i6,461
Accumulated
other comprehensive loss
(i833)
(i868)
(i782)
Total
shareholders’ investment
i12,578
i11,833
i11,836
Total
liabilities and shareholders’ investment
$
i48,000
$
i42,779
$
i41,566
Common
Stock Authorized iii6,000,000,000//
shares, $iii0.0833//
par value; ii500,252,831/, ii504,198,962/
and ii511,335,375/ shares issued and outstanding
at August 1, 2020, February 1, 2020, and August 3, 2019, respectively.
Preferred Stock Authorized iii5,000,000//
shares, $iii0.01//
par value; iiiiiino/////
shares were issued or outstanding during any period presented.
We
declared $i0.68 and $i0.66 dividends per share for the three months ended August 1, 2020, and August 3,
2019, respectively, and $i2.62 per share for the fiscal year ended February 1, 2020.
Notes to Consolidated Financial Statements (unaudited)
1. iAccounting Policies
These unaudited condensed consolidated financial statements are prepared in accordance with the rules and regulations
of the Securities and Exchange Commission (SEC) applicable to interim financial statements. While these statements reflect all normal recurring adjustments that are, in the opinion of management, necessary for fair presentation of the results of the interim period, they do not include all of the information and footnotes required by United States (U.S.) generally accepted accounting principles (U.S. GAAP) for complete financial statements. These condensed consolidated financial statements should be read in conjunction with the financial statement disclosures in our 2019 Form 10-K.
We use the same accounting policies in preparing quarterly and annual financial statements. Unless otherwise noted, amounts presented within the Notes to Consolidated Financial Statements refer to our continuing operations.
We operate
as a single segment that includes all of our continuing operations, which are designed to enable guests to purchase products seamlessly in stores or through our digital channels. Nearly all of our revenues are generated in the U.S. The vast majority of our long-lived assets are located within the U.S.
Due to the seasonal nature of our business, quarterly revenues, expenses, earnings, and cash flows are not necessarily indicative of the results that may be expected for the full year.
2. iImpact
of Coronavirus (COVID-19)
On March 11, 2020, the World Health Organization declared the novel coronavirus disease (COVID-19) a pandemic, and on March 13, 2020, the United States declared a national emergency. States and cities have taken various measures in response to COVID-19, including mandating the closure of certain businesses and encouraging or requiring citizens to avoid large gatherings. To date all of our stores, digital channels, and distribution centers remain open.
Throughout the six months ended August 1, 2020, guest shopping patterns changed significantly and unpredictably in reaction to the COVID-19 pandemic. iFour
of our ifive core merchandise categories have experienced significant sales growthyear-to-date; however, sales of Apparel and Accessories declined significantly in the first quarter before rebounding in the second quarter.Note 3
provides sales by category. In response to these changes, we have taken many actions, including accelerating purchases of certain merchandise in our core categories and slowing or canceling certain purchase orders, primarily for Apparel and Accessories. As a result of these actions, during the first quarter of 2020, we recorded $i216 million of purchase order cancellation fees in Cost of Sales.
General merchandise sales represent the vast majority of our revenues. We also earn revenues
from a variety of other sources, most notably credit card profit sharing income from our arrangement with TD Bank Group (TD).
(a)Includes
apparel for women, men, boys, girls, toddlers, infants and newborns, as well as jewelry, accessories, and shoes.
(b)Includes beauty and personal care, baby gear, cleaning, paper products, and pet supplies.
(c)Includes dry grocery, dairy, frozen food, beverages, candy, snacks, deli, bakery, meat, produce, and food service in our stores.
(d)Includes electronics (including video game hardware and software), toys, entertainment, sporting goods, and luggage.
(e)Includes furniture, lighting, storage, kitchenware, small appliances, home décor, bed and bath, home improvement, school/office supplies, greeting cards and party supplies, and other seasonal merchandise.
/
Merchandise
sales – We record almost all retail store revenues at the point of sale. Digitally originated sales may include shipping revenue and are recorded upon delivery to the guest or upon guest pickup at the store. Sales are recognized net of expected returns, which we estimate using historical return patterns and our expectation of future returns. As of August 1, 2020, February 1, 2020, and August 3, 2019, the accrual for estimated returns was $i201
million, $i117 million, and $i131 million, respectively. Other than as described below, we have not historically had notable adjustments
to our returns estimates.
From March 26, 2020 to April 26, 2020, we did not accept in-store merchandise returns and exchanges to protect our team members from COVID-19. We lengthened the return period for merchandise affected by this change. Our returns estimate for sales during the suspension period included significant assumptions, including the impact of the lengthened return period, sales mix, and recent changes in guest returns behavior. At May 2, 2020, the returns reserve totaled $i398 million.
After resuming guest returns, we received fewer returns than originally expected. During the second quarter, we reduced our estimate of sales returns, which increased sales by $i146 million and operating income by $i110 million.
i
Revenue
from Target gift card sales is recognized upon gift card redemption, which is typically within one year of issuance.
(a)Included
in Accrued and Other Current Liabilities.
(b)Net of estimated breakage.
/
Credit card profit sharing – We receive payments under a credit card program agreement with TD. Under the agreement, we receive a percentage of the profits generated by the Target Credit Card and Target MasterCard receivables in exchange for performing account servicing and primary marketing functions. TD underwrites, funds, and owns Target Credit Card and Target MasterCard receivables, controls risk management policies, and oversees regulatory compliance.
(a)The
carrying amounts of certain other current assets, commercial paper, accounts payable, and certain accrued and other current liabilities approximate fair value due to their short-term nature.
(b)The fair value of debt is generally measured using a discounted cash flow analysis based on current market interest rates for the same or similar types of financial instruments and would be classified as Level 2. These amounts exclude commercial paper, unamortized swap valuation adjustments, and lease liabilities.
/
5. iProperty
and Equipment
We review long-lived assets for impairment when store performance expectations, events, or changes in circumstances—such as a decision to relocate or close a store or distribution center, discontinue projects, or make significant software changes—indicate that the asset’s carrying value may not be recoverable. We recognized impairment charges of $i25 million and $i60
million during the three and six months ended August 1, 2020, respectively. We recognized impairment charges of $i10 million and $i13
million during the three and six months ended August 3, 2019, respectively. These impairment charges are included in Selling, General and Administrative Expenses (SG&A).
6. iCommercial Paper and Long-Term Debt
In March 2020, we issued unsecured fixed rate debt
of $i1.5 billion at i2.250 percent that matures in April 2025 and $i1.0 billion
at i2.650 percent that matures in September 2030.
We obtain short-term financing from time to time under our commercial paper program. iNo
balances were outstanding at any time during the six months ended August 1, 2020. For the six months ended August 3, 2019, the maximum amount outstanding was $i744 million, and the average daily amount outstanding was $i74
million at a weighted average annual interest rate of i2.4 percent, with ino balance outstanding as of August 3,
2019.
In April 2020, we obtained a committed $i900 million i364-day unsecured revolving credit facility that expires in April
2021. This new facility is in addition to our $i2.5 billion unsecured revolving credit facility that expires in October 2023. iiiNo//
balances were outstanding under either credit facility at any time during 2020 or 2019.
Our derivative instruments consist of interest rate swaps used to mitigate interest rate risk. As a result, we have counterparty credit exposure to large global financial institutions, which we monitor on an ongoing basis. Note 4 to the Consolidated Financial Statements provides the fair value and classification of these instruments.
As of August 1, 2020, and August 3, 2019, we were party to interest rate swaps with notional amounts totaling $ii1.5/ billion.
We pay a variable rate and receive a fixed rate under each of these agreements. All of the agreements are designated as fair value hedges, and all were perfectly effective during the three and six months ended August 1, 2020, and August 3, 2019.
As of August 1, 2020, we were party to forward-starting interest rate swaps with notional amounts totaling $i250 million
to hedge the interest rate exposure of anticipated future debt issuances. We designated these derivative financial instruments as cash flow hedges. We assess, both at inception and on an ongoing basis, whether the derivative financial instrument is highly effective in offsetting changes in cash flows of the hedged item and whether it is probable that the hedged forecasted transaction will occur. As of August 1, 2020, a $i12 million
loss was recorded in Accumulated Other Comprehensive Loss and will be reclassified to Net Interest Expense when the forecasted transaction affects earnings.
Gain
(loss) on fair value hedges recognized in Net Interest Expense
Interest rate swap designated as fair value hedges
$
i11
$
i86
$
i102
$
i101
Hedged
debt
(i11)
(i86)
(i102)
(i101)
Total
$
i—
$
i—
$
i—
$
i—
/
8.
iShare Repurchase
We periodically repurchase shares of our common stock under a board-authorized repurchase program through a combination of open market transactions, accelerated share repurchase (ASR) arrangements, and other privately negotiated transactions with financial institutions.
(a)This
table includes activity related to the ASR arrangement entered in first quarter 2019 because final settlement occurred in second quarter 2019. Under the ASR arrangement, we repurchased i4.2 million shares for a total cash investment of $i340 million.
We did not enter into any new ASR arrangements during second quarter 2019.
/
In March 2020, we suspended share repurchase activity.
•Operating income of $2.3 billion was 73.8 percent higher than the comparable prior-year period.
Sales
were $22.7 billion for the three months ended August 1, 2020, an increase of $4.5 billion, or 24.8 percent, from the same period in the prior year. Operating cash flow provided by continuing operations was $5.1 billion for the six months ended August 1, 2020, an increase of $2.3 billion, or 82.1 percent, from $2.8 billion for the six months ended August 3, 2019.
Note: Amounts
may not foot due to rounding. Adjusted diluted earnings per share from continuing operations (Adjusted EPS), a non-GAAP metric, excludes the impact of certain items. Management believes that Adjusted EPS is useful in providing period-to-period comparisons of the results of our continuing operations. A reconciliation of non-GAAP financial measures to GAAP measures is provided on page 19.
We report after-tax return on invested capital (ROIC) from continuing operations because we believe ROIC provides a meaningful measure of our capital-allocation effectiveness over time. For the trailing twelve months ended August 1, 2020, after-tax ROIC was 17.2 percent, compared with 15.2 percent for the trailing twelve months ended August 3, 2019. The calculation of ROIC is provided
on page 21.
Impact of COVID-19
On March 11, 2020, the World Health Organization declared the novel coronavirus disease (COVID-19) a pandemic, and on March 13, 2020, the United States declared a national emergency. The rapid development and fluidity of this situation limits our ability to predict the ultimate impact of COVID-19 on our business, financial condition and financial performance, which could be material. States and cities have taken various measures in response to COVID-19, including mandating the closure of certain businesses and encouraging or requiring citizens to avoid large gatherings. We have implemented numerous safety measures to protect our guests and team members
— such as mandating face masks for all team members and guests in our stores, more rigorous cleaning processes, providing disposable face masks, gloves and thermometers for team members, installing distancing markers, limiting guest levels within our stores, and installing partitions at all stores. We have also reduced store hours to support increased cleaning and replenishment efforts and implemented quantity limits on certain high-demand merchandise. In addition, we have reserved certain store hours for guests with increased vulnerability to COVID-19. To date all of our stores, digital channels, and distribution centers remain open.
As the crisis has evolved, we have experienced unusually strong sales, as guests rely on Target for essential items like food, medicine, cleaning products, and household stock-up items. Underlying this trend, we saw significant volatility in our sales mix,
including both category sales mix and the mix of sales in our stores and digital channels, including same-day fulfillment options.
•During the first quarter, comparable sales increased 10.8 percent, reflecting a 0.9 percent increase in store originated comparable sales and a 141 percent increase in digitally originated comparable sales. The quarter began with strength across our multi-category portfolio, followed by a shift to strong comparable sales growth in our Food and Beverage and Beauty and Household Essentials core merchandising categories and significant comparable sales declines in Apparel and Accessories. Comparable sales in Apparel and Accessories recovered notably beginning mid-April.
•During the second quarter, comparable sales increased 24.3 percent, reflecting a 10.9 percent increase in store originated comparable sales and a 195 percent increase in digitally originated comparable sales. Comparable sales growth was strong across our multi-category portfolio, with slightly higher growth in lower-margin categories. Monthly variability in comparable sales continued, with comparable sales increases of 32.9 percent in May, 21.4 percent in June, and 19.7 percent in July.
For the six months ended August 1, 2020, gross margin has been negatively
impacted by changes in both our category and channel sales mix, as well as actions that we have taken to allow us to better fulfill guest demand for essentials. Additionally, gross margin reflects COVID-19-related investments in pay and benefits for our supply chain team members.
Our SG&A expenses have also been significantly impacted by incremental costs related to investments in pay and benefits for store team members, the spikes in merchandise volume in stores and the supply chain, incremental safety and cleaning supplies, and the impact of additional team member hours dedicated to more rigorous cleaning routines in our facilities.
To support our team and minimize potential disruptions in their work to serve our guests, we have modified our plans for some of our strategic
initiatives, including our previously announced remodel program. We have completed approximately 130 remodels in 2020, down from the previous expectation of approximately 300. Similarly, we now expect to open up to 30 new small format stores in 2020, rather than the 36 previously announced.
During the six months ended August 1, 2020, we issued $2.5 billion of 5-year and 10-year notes in an effort to increase our cash on hand. Additionally, we entered into a $900 million 364-day credit facility, increasing our total undrawn committed credit facilities to $3.4 billion. Our dividend policy remains unchanged; however, we have temporarily suspended share repurchase activity due to continued uncertainty in the current environment. The Liquidity
and Capital Resources section provides additional information.
Depreciation and amortization (exclusive of depreciation included in cost of sales) expense rate
2.4
3.0
2.6
3.2
Operating
income margin rate
10.0
7.2
6.5
6.8
Note: Gross margin rate is calculated as gross margin (sales less cost of sales) divided by sales. All other rates are calculated by dividing the applicable amount by total revenue.
Sales include all merchandise sales, net of expected returns, and our estimate of gift card breakage. We use comparable sales to evaluate the performance of our stores and digital channel sales by measuring the change in sales for a period over the comparable, prior-year period of equivalent length. Comparable sales include all sales, except sales from stores open less than 13 months, digital acquisitions we have owned less than 13 months, stores that have been closed, and digital acquisitions that we
no longer operate. Comparable sales measures vary across the retail industry. As a result, our comparable sales calculation is not necessarily comparable to similarly titled measures reported by other companies. Digitally originated sales include all sales initiated through mobile applications and our websites. Our stores fulfill the majority of digitally originated sales, including shipment from stores to guests, store Order Pick Up or Drive Up, and delivery via our wholly owned subsidiary, Shipt. Digitally originated sales may also be fulfilled through our distribution centers, our vendors, or other third parties.
Sales growth – from both comparable sales and new stores – represents an important driver of our long-term profitability. We expect that comparable sales growth
will drive the majority of our total sales growth. We believe that our ability to successfully differentiate our guests’ shopping experience through a careful combination of merchandise assortment, price, convenience, guest experience, and other factors will over the long-term drive both increasing shopping frequency (traffic) and the amount spent each visit (average transaction amount).
The increase in sales during the three and six months ended August 1, 2020, is due to a comparable sales increase of 24.3 percent and 17.7 percent, respectively, and the contribution from new stores.
The
collective interaction of a broad array of macroeconomic, competitive, and consumer behavioral factors, as well as sales mix, and transfer of sales to new stores makes further analysis of sales metrics infeasible. As previously discussed, we believe that COVID-19 has had a significant impact on the mix of sales amongst our sales channels and categories.
We monitor the percentage of purchases that are paid for using RedCards (RedCard Penetration) because our internal analysis has indicated that a meaningful portion of the incremental purchases on RedCards are also incremental sales for Target. Guests receive a 5 percent discount on virtually all purchases when they use a RedCard at Target.
For the three months ended August 1, 2020, our gross margin rate was 30.9 percent compared with 30.6 percent in the comparable period last year. This increase reflected the net impact of merchandising strategies, primarily favorability in clearance and promotional markdowns, and the favorable impact of a change in our returns estimate for sales during the temporary returns suspension period in the first quarter of 2020. The increase was partially offset
by increased digital fulfillment and supply chain costs (driven by unusually strong growth in digital volume and higher pay and benefit costs classified within Cost of Sales, including incremental pay and benefits due to COVID-19) and unfavorable category sales mix, as sales growth was strongest in lower-margin categories.
For the six months ended August 1, 2020, our gross margin rate was 28.3 percent compared with 30.1 percent in the comparable period last year. This decrease reflected increased digital fulfillment and supply chain costs (driven by unusually strong growth in digital volume and the impact of higher pay and benefit costs classified within Cost of Sales, including incremental pay and benefits due to COVID-19) and unfavorable
category sales mix, as sales growth was strongest in lower-margin categories. The decrease was partially offset by the net impact of merchandising strategies, primarily favorability in clearance and promotional markdowns. Sales returns relating to the temporary returns suspension period during the first quarter of 2020 did not notably affect our year-to-date gross margin rate.
Selling, General, and Administrative Expense Rate
For the three and six months ended August 1, 2020, our SG&A expense rate was 19.4 percent and 20.0 percent, respectively, compared with 21.2 percent and 21.0 percent, respectively, in the comparable periods last year. Incremental team member pay and benefits and investments to protect
the health and safety of guests represented approximately $400 million of the $548 million increase in SG&A expenses for the three months ended August 1, 2020, and approximately $600 million of the $945 million increase for the six months ended August 1, 2020, compared with the prior year periods. From a rate perspective, these increased costs were more than offset by leverage resulting from strong revenue growth.
(a)In
thousands, reflects total square feet less office, distribution center, and vacant space.
Other Performance Factors
Provision for Income Taxes
Our effective income tax rate from continuing operations for the three and six months ended August 1, 2020, was 22.8 percent and 21.6 percent, respectively, compared with 23.0 percent and 22.7 percent, respectively, for the comparable periods last year. The effective tax rate for the six months ended August 1,
2020, reflects a larger rate benefit from discrete items, primarily related to share-based payments, compared with the prior year.
Reconciliation of Non-GAAP Financial Measures to GAAP Measures
To provide additional transparency, we have disclosed non-GAAP adjusted diluted earnings per share from continuing operations (Adjusted EPS). This metric excludes certain items presented below. We believe this information is useful in providing
period-to-period comparisons of the results of our continuing operations. This measure is not in accordance with, or an alternative to, generally accepted accounting principles in the U.S. (GAAP). The most comparable GAAP measure is diluted earnings per share from continuing operations. Adjusted EPS should not be considered in isolation or as a substitution for analysis of our results as reported in accordance with GAAP. Other companies may calculate Adjusted EPS differently, limiting the usefulness of the measure for comparisons with other companies.
Earnings from continuing operations before interest expense and income taxes (EBIT) and earnings from continuing operations before interest expense, income taxes, depreciation, and amortization (EBITDA) are non-GAAP financial measures. We believe these measures provide meaningful information about our operational efficiency compared with our competitors by excluding the impact of differences in tax jurisdictions and structures, debt levels, and for EBITDA, capital investment. These measures are not in accordance with, or an alternative to, GAAP. The most comparable GAAP measure is net earnings from continuing operations. EBIT and EBITDA should not be considered in isolation or as a substitution for analysis of our results as reported in accordance with GAAP. Other companies may calculate EBIT and EBITDA differently, limiting the usefulness of the measures for comparisons with other
companies.
We have also disclosed after-tax ROIC, which is a ratio based on GAAP information, with the exception of the add-back of operating lease interest to operating income. We believe this metric is useful in assessing the effectiveness of our capital allocation over time. Other companies may calculate ROIC differently, limiting the usefulness of the measure for comparisons with other
companies.
Current portion of long-term debt and other borrowings
$
109
$
1,153
$
1,044
+
Noncurrent portion of long-term debt
14,188
10,365
10,108
+ Shareholders' investment
12,578
11,836
11,167
+
Operating lease liabilities (c)
2,448
2,285
2,183
- Cash and cash equivalents
7,284
1,656
1,180
Invested
capital
$
22,039
$
23,983
$
23,322
Average invested capital (d)
$
23,011
$
23,652
After-tax
return on invested capital
17.2
%
15.2
%
(a)Represents the add-back to operating income driven by the hypothetical interest expense we would incur if the property under our operating leases were owned or accounted for as finance leases. Calculated using the discount rate for each lease and recorded as a component of rent expense within SG&A Expenses. Operating lease interest is added back to operating income in the ROIC calculation to control for differences in capital structure between us and our competitors.
(b)Calculated
using the effective tax rates for continuing operations, which were 21.4 percent and 20.7 percent for the trailing twelve months ended August 1, 2020, and August 3, 2019, respectively. For the trailing twelve months ended August 1, 2020, and August 3, 2019, includes tax effect of $1.1 billion and $919 million, respectively, related to EBIT, and $19 million and $18 million, respectively, related to operating lease interest.
(c)Total short-term and long-term operating lease liabilities included within Accrued and Other Current Liabilities and Noncurrent Operating Lease Liabilities.
(d)Average based on the invested capital at the end of the current
period and the invested capital at the end of the comparable prior period.
We follow a disciplined and balanced approach to capital allocation
based on the following priorities, ranked in order of importance: first, we fully invest in opportunities to profitably grow our business, create sustainable long-term value, and maintain our current operations and assets; second, we maintain a competitive quarterly dividend and seek to grow it annually; and finally, we return any excess cash to shareholders by repurchasing shares within the limits of our credit rating goals.
We believe our sources of liquidity will continue to be adequate to maintain operations, finance anticipated expansion and strategic initiatives, fund debt maturities, and pay dividends. In response to COVID-19, we have suspended our share repurchase program. We continue to anticipate ample access to commercial paper and long-term financing.
Our cash and cash equivalents balance was $7.3
billion, $2.6 billion, and $1.7 billion at August 1, 2020, February 1, 2020, and August 3, 2019, respectively. Our cash and cash equivalents balance includes short-term investments of $6.4 billion, $1.8 billion, and $796 million as of August 1, 2020, February 1, 2020, and August 3, 2019, respectively. Our investment policy is designed to preserve principal and liquidity of our short-term investments. This policy allows investments in large money market funds or in highly rated direct short-term instruments that mature in 60 days or less. We also place dollar limits on our investments in individual funds or instruments.
Operating
Cash Flows
Operating cash flow provided by continuing operations was $5.1 billion for the six months ended August 1, 2020, compared with $2.8 billion for the six months ended August 3, 2019. The increase reflects stronger operating performance combined with higher payables leverage during the six months ended August 1, 2020, due to increased inventory turnover driven by strong sales, compared with higher net settlement of accounts payable during the six months ended August 3,
2019, resulting from elevated inventory and accounts payable levels as of February 2, 2019. Additionally, operating cash flows for the six months ended August 1, 2020, reflect increased payroll-related liabilities, including the deferral of employer social security tax payments. Also, lower first quarter 2020 pretax earnings resulted in a decrease in year-to-date income tax payments.
Inventory
Inventory was $8.9 billion as of August 1, 2020, compared with $9.0 billion and $9.1 billion at February 1, 2020, and August 3,
2019, respectively. The decrease reflects elevated sell-through rates in longer-lead time merchandise categories, partially offset by increases in Food and Beverage and Beauty and Household Essentials inventory to align with sales trends.
Investing Cash Flows
Cash flow for investing activities included capital expenditures of $1.4 billion for the six months ended August 1, 2020, and August 3, 2019. During the six months ended August 1, 2020, we completed new store and remodel projects that were in process as the COVID-19 crisis developed. However, in response to COVID-19,
we have modified plans for some of our strategic initiatives including store remodels and new store openings. We expect full year 2020 capital expenditures to be at a lower level than in 2019.
Dividends
We paid dividends totaling $330 million ($0.66 per share) and $662 million ($1.32 per share) for the three and six months ended August 1, 2020, respectively, and $328 million ($0.64 per share) and $658 million ($1.28 per share) for the three and six months ended August 3, 2019, respectively, a per share increase of 3.1 percent. We declared dividends totaling $344 million ($0.68 per share) during the second quarter of 2020, a per share increase of 3.0 percent over the $341 million
($0.66 per share) of declared dividends during the second quarter of 2019. We have paid dividends every quarter since our 1967 initial public offering, and it is our intent to continue to do so in the future.
Our financing strategy is to ensure
liquidity and access to capital markets, to maintain a balanced spectrum of debt maturities, and to manage our net exposure to floating interest rate volatility. Within these parameters, we seek to minimize our borrowing costs. Our ability to access the long-term debt and commercial paper markets has provided us with ample sources of liquidity. Our continued access to these markets depends on multiple factors, including the condition of debt capital markets, our operating performance, and maintaining strong credit ratings. As of August 1, 2020, our credit ratings were as follows:
Credit Ratings
Moody’s
Standard and Poor’s
Fitch
Long-term
debt
A2
A
A-
Commercial paper
P-1
A-1
F1
If our credit ratings were lowered, our ability to access the debt markets, our cost of funds, and other terms for new debt issuances could be adversely impacted. Each of the credit rating agencies reviews its rating periodically and there is no guarantee our current credit ratings will remain the same as described above.
In March 2020, we issued $2.5 billion of debt. Notes
6 and 7 to the Consolidated Financial Statements provide additional information.
We have additional liquidity through a committed $900 million 364-day revolving credit facility obtained through a group of banks in April 2020, which expires in April 2021, and an existing $2.5 billion revolving credit facility obtained through a group of banks, which expires in October 2023. No balances were outstanding under either credit facility at any time during 2020 or 2019.
Most of our long-term debt obligations contain covenants related to secured debt levels. In addition to a secured debt level covenant, our credit facilities also contain a debt leverage
covenant. We are, and expect to remain, in compliance with these covenants. Additionally, as of August 1, 2020, no notes or debentures contained provisions requiring acceleration of payment upon a credit rating downgrade, except that certain outstanding notes allow the note holders to put the notes to us if within a matter of months of each other we experience both (i) a change in control and (ii) our long-term credit ratings are either reduced and the resulting rating is non-investment grade, or our long-term credit ratings are placed on watch for possible reduction and those ratings are subsequently reduced and the resulting rating is non-investment grade.
Contractual Obligations and Commitments
As
of the date of this report, other than the new borrowings discussed in Note 6 to the Consolidated Financial Statements, there were no material changes to our contractual obligations and commitments outside the ordinary course of business since February 1, 2020, as reported in our 2019 Form 10-K.
New Accounting Pronouncements
We
do not expect any recently issued accounting pronouncements to have a material effect on our financial statements.
TARGET CORPORATION
Q2 2020 Form 10-Q
23
MANAGEMENT'S
DISCUSSION AND ANALYSIS & SUPPLEMENTAL INFORMATION
This report contains forward-looking statements, which are based on our current assumptions and expectations. These statements are typically accompanied by the words “expect,”“may,”“could,”“believe,”“would,”“might,”“anticipates,” or similar words. The principal forward-looking statements in this report include: our financial performance, statements regarding the adequacy of and costs associated with our sources of liquidity, the funding of debt maturities, the continued execution of our share repurchase program, our expected capital expenditures and new lease commitments, the expected compliance with debt covenants, the expected impact of new accounting pronouncements, our intentions regarding future dividends, the expected return on plan assets, the expected outcome of, and adequacy of our reserves for, claims, litigation and the resolution of tax matters, the expected impact of changes in information technology systems, future responses to and effects of the COVID-19 pandemic, and changes in our assumptions and expectations.
All such forward-looking statements
are intended to enjoy the protection of the safe harbor for forward-looking statements contained in the Private Securities Litigation Reform Act of 1995, as amended. Although we believe there is a reasonable basis for the forward-looking statements, our actual results could be materially different. The most important factors which could cause our actual results to differ from our forward-looking statements are set forth in our description of risk factors included in Part I, Item 1A, Risk
Factors of our Form 10-K for the fiscal year ended February 1, 2020 and Part II, Item 1A, Risk Factors
of our Form 10-Q for the quarter ended May 2, 2020, which should be read in conjunction with the forward-looking statements in this report. Forward-looking statements speak only as of the date they are made, and we do not undertake any obligation to update any forward-looking statement.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
Changes in Internal Control Over Financial Reporting
During the most recently completed fiscal quarter, the following changes materially affected, or are reasonably likely to materially affect, our internal control over financial reporting:
•We are in the process of a broad multi-year migration of many mainframe-based systems and middleware products to a modern platform, including systems and processes supporting inventory and supply chain-related transactions.
•In
March 2020, as a result of COVID-19, we temporarily suspended physical inventory counts at our stores. We resumed physical inventory counts in June 2020 using a statistical sampling method, and we have continued to record estimated losses related to shrink and markdowns based upon historical rates.
During the most recently completed fiscal quarter, no other changes in our internal control over financial reporting materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
Evaluation of Disclosure Controls and Procedures
As of the end of the period covered by this quarterly report, we conducted an evaluation, under supervision and with the participation of management, including
the chief executive officer and chief financial officer, of the effectiveness of the design and operation of our disclosure controls and procedures pursuant to Rules 13a-15 and 15d-15 of the Securities Exchange Act of 1934, as amended (Exchange Act). Based upon that evaluation, our chief executive officer and chief financial officer concluded that our disclosure controls and procedures are effective at a reasonable assurance level. Disclosure controls and procedures are defined by Rules 13a-15(e) and 15d-15(e) of the Exchange Act as controls and other procedures that are designed to ensure that information required to be disclosed by us in reports filed with the SEC under the Exchange Act is recorded, processed, summarized, and reported within the time periods specified in the SEC’s rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by us in reports filed
under the Exchange Act is accumulated and communicated to our management, including our principal executive and principal financial officers, or persons performing similar functions, as appropriate, to allow timely decisions regarding required disclosure.
The following update to a previously reported proceeding is being reported pursuant to Item 103 of Regulation S-K:
On
July 28, 2020, the U.S. Court of Appeals for the Eighth Circuit affirmed the prior decision by the United States District Court for the District of Minnesota (the Court) dismissing the purported Employee Retirement Income Security Act of 1974 (ERISA) class action previously filed in the Court on August 30, 2017 (the Second ERISA Class Action). The Second ERISA Class Action involved claims arising from investments in Target stock by participants in or beneficiaries of the Target Corporation 401(k) Plan and the Target Corporation Ventures 401(k) Plan during Target’s expansion of retail operations into Canada and was previously described in Target’s annual report on Form 10-K
for the fiscal year ended February 1, 2020.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
On September 19, 2019, our Board
of Directors authorized a $5 billion share repurchase program with no stated expiration. We began repurchasing shares under the authorization during the first quarter of 2020, prior to suspending share repurchase activity in March 2020. Under the program, we have repurchased 4.6 million shares of common stock at an average price of $105.80, for a total investment of $484 million. As of August 1, 2020, the dollar value of shares that may yet be purchased under the program is $4.5 billion. There were no Target common stock purchases made during the three months ended August 1, 2020, by Target or any "affiliated purchaser" of Target, as defined in Rule 10b-18(a)(3) under the Exchange Act.
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
